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Government proposes new commercial lease rent abatement clause

What has been proposed? 

The government proposed to amend the Property Law Act 2007 by inserting a clause into commercial leases, when introducing the Covid-19 Response (Management Measures) Legislation Bill.

The proposal notes that when there is an epidemic and the tenant is unable to access all, or part, of their leased premises due to health and safety reasons, that the landlord and tenant should negotiate for a ‘fair proportion’ of an abatement in rent and outgoings. The proposal indicates that this could take place from the 28th of September (inviting submissions on the date) and be enforced for the period of the epidemic, which in this case is up to the 19th of December 2021, which could potentially be extended.

Didn’t this happen in 2020?

The government looked to introduce a similar, albeit different, amendment in June 2020. It did not proceed, most seemingly a result of the coalition government at the time, with Winston Peters calling it “poorly targeted policy”. Also, many, but not all, landlords and tenants had or were already in the midst of negotiation given it was finally proposed in June after the country went into its first Alert Level 4 lockdown in March 2020.

So, what are some of the differences this time? 

Apart from there being no coalition government this time, other differences include:

  • there has been a substantial time period put in place irrespective of Alert Levels
  • there isn’t a restriction on business size, previously it was 20 or fewer full-time staff at the leased premises
  • the government is seemingly leaving it up to the landlord and tenant to agree on what is ‘fair proportion’
  • suggested that if ‘fair proportion’ is not determinable, parties seek mediation or arbitration
  • parties could agree that the clause does not apply
  • would only apply to leases which do not already provide for adjusted rent payment terms during an epidemic emergency.

Was there guidance on what ‘fair proportion’ was previously? 

Yes, there were some guidelines to assist with what ‘fair’ might look like, such as taking into consideration the levels of tenant income lost during the period the company could not trade fully, any landlord mortgage obligations, the previous years’ profitability of both parties, any financial assistance provided, the ability of both parties to survive financially and any other relevant factors. The government also provided $40 million for accessing dispute resolution services, which has now ended.

What about the ADLS lease clause 27.5?

Given many agreements utilise an ADLS lease, which has the 27.5 ‘no access clause’, discussion is arising that this could be considered a rent adjustment clause anyway. Further, there will already be many current agreements in place that will potentially supersede this proposal, which comes 1.5 years after Covid-19 was officially called a global pandemic by the World Health Organisation.

So, what now? 

The proposal is still to go to the select committee, and there is a lot of lobbying underway given the implications that changing existing legal contracts represents, so some changes may still occur. It would be fair to say that there are seemingly a few gaps, leaving many potentially feeling that the proposal is not of real assistance for landlords or tenants. With strict lockdowns (fingers crossed) already behind us, many will have negotiated a way forward a long time ago, so this will be of less relevance. No guidance on what ‘fair proportion’ represents doesn’t really help, especially those in a dispute already. Perhaps the best way forward from this is to focus on how New Zealand emerges safely and effectively from current Covid-19 restrictions, so that the clause doesn’t need to be enacted.